SEC proposes reforms to in-house trials on heels of criticism by defense bar

WASHINGTON (Reuters) - Amid mounting pressure from defense attorneys, the U.S. Securities and Exchange Commission took steps on Thursday to level the playing field for defendants who go toe-to-toe with the agency in its own home court.

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg

The SEC proposed to modernize some of its outdated rules governing in-house trials, in an effort to assuage critics who complain the venue is unfair and gives the regulator a leg up.

It calls for permitting defendants to depose witnesses in their cases and it would permit defense lawyers to delay the start of a trial so they have more time to pour through often massive files of evidence.

The 2010 Dodd-Frank Wall Street reform law gave the SEC greater powers to file cases against a wider universe of defendants before its own in-house judges, as opposed to federal courts.

That has raised the ire of defense lawyers, who say administrative proceedings afford clients less protections, such as limited discovery, no juries and speedier trials.

Defense lawyers on Thursday said they were cautiously optimistic that the SEC was starting to show progress. Until now, the agency has largely resisted calls for change.

“The SEC’s procedural rules...have not been updated in 20 years, and with the significant number of complex cases now being handled administratively, change was seriously needed,” said Stephen J. Crimmins, an attorney with Murphy & McGonigle.

At the same time, however, many said the plan still falls short. It does not, for instance, change the appeals process in which defendants must first appear before the five-member commission that voted to authorize the case before they can turn to a federal appeals court.

“Other improvements could be made to address the concerns that have been raised by private litigants, such as the SEC’s sole discretion in choosing the forum to litigate, the appointment and removal process of the administrative law judges, and the appeals process,” said Bradley J. Bondi, an attorney with Cahill Gordon & Reindel.

Stephen D. Councill, an attorney with Rogers & Hardin, also said the plan is still too limited, adding it would only permit three depositions per side, or five if there are multiple defendants.

“That’s a nice gesture, but I have seen very few cases where there are only three key witnesses in a case,” he said.

Over the last few years, defendants have started to challenge the SEC’s choice of trial venue with increasing frequency.

They have primarily argued that the venue is unconstitutional because, they say, administrative law judges are “inferior officers” and yet they cannot be directly removed by the SEC chair.

So-called inferior officers are appointed by the president or other administration officials without the approval of the U.S. Senate.

Few of those efforts have been successful. But then in June, a real estate developer named Charles Hill hit a breakthrough after he convinced a federal judge in Georgia to stay his in-house trial on insider trading charges so she could seriously consider the Constitutional argument.